Is it really a “tied-house” if your alcoholic beverage category isn’t sold by the retailer?

In a recent and interesting challenge to the three-tiered system’s prohibition on “tied-houses” a winery owner looking to maintain an interest in some Iowa convenience stores made an interesting argument: since the convenience stores only sold beer and not wine, the mutual ownership didn’t violate the Iowa prohibition on tied-houses.

Iowa, like most states has a blanket prohibition with three basic categories (manufacturers, wholesalers, and retailers). Its law, Iowa Code section 123.45, prohibits “manufacturers” from owning interests in “retailers” and like many similar state prohibitions, it makes no distinction between beer, wine and liquor manufacturers or retailers:

A person engaged in the business of manufacturing, bottling, or wholesaling alcoholic beverages, wine, or beer…, shall not … directly or indirectly extend any credit for alcoholic beverages or beer or pay for any such license or permit, nor directly or indirectly be interested in the ownership, conduct, or operation of the business of another licensee or permittee authorized under this chapter to sell at retail, nor hold a retail liquor control license or retail wine or beer permit.

The convenience stores in Iowa wanted to have a permit to sell beer, but because of the common ownership by a person with an interest in an out-of-state winery, Iowa would not issue the license based on the prohibitions stated in section 123.45.

In challenging the administrative ruling the petitioner argued that the statute was written in the disjunctive, thereby making a distinction between the categories “alcoholic beverages” “beer” and “wine”, but in the opinion from the administrative law judge, the Division charged with interpreting the statute goes on for a few pages in making a tautological argument; stating that since the statute means there is no distinction between different categories of manufacturers (e.g. beer, wine, distilled spirits) then they will interpret it it mean that there is not a distinction between categories of alcohol and they will apply the prohibition as to all categories upon all retailers. You can read the administrative decision here.

Sadly, the lawsuit didn’t challenge the statute, it only went for an “as-applied” challenge trying to get the Iowa Alcoholic Beverage Division to interpret the prohibition in a way that saw the beverage categories as distinct “manufacturers” which would allow for a distinction in whether the house was really – “tied” i.e., the manufacturer really had an interest. The real questions raised are those abou the rational basis for prohibiting a brewery from owning a distilled spirits distributor, or from a person with an interest in a wine distribution company from owning a scotch or whiskey only specialty retailer.

Why isn’t the class of manufactured alcohol taken into account in these blanket prohibitions? Is there any rational basis in stating that a winery owner couldn’t own a bottle shop that sold only beer? Where it the “tie” in the “tied-house” formula if the product isn’t sold or used at the “house”? This argument doesn’t just pass the sniff test, it’s an argument that should be tested in challenging these cross-category prohibitions. Sometimes state regulations are overly broad and it takes a good while for economics and consumer trends to change enough that people start to realize that an overly broad statute unfairly limits commercial practices based on faulty premises. This cross-category prohibition is one of those instances.